Mixed messages

Commentary: Treasury extends another $1.5 billion to Chrysler

SAN FRANCISCO (MarketWatch) -- In one of the Bush administration's final acts, the Treasury Department late Friday granted another $1.5 billion in emergency loans to Chrysler Financial.

Chrysler, the most sub of the nation's subprime auto makers, no doubt appreciates the cash, which comes three weeks after it received $4 billion in bailout money, part of the initial $17.4 billion rescue package it shares with General Motors
GM, -2.45%

Today's package gives much-needed liquidity to Chrysler's financial-services business so it can write more loans for car buyers caught in a tight credit market. Read full story on Chrysler.

But it doesn't bridge the financial shortcomings facing Chrysler itself. Last week, Chrysler CEO Bob Nardelli told reporters in Detroit that the company still needs another $3 billion to survive, leaving open the possibility of bankruptcy if Nardelli's estimates are right.

With sales down 53% from a year ago, Chrysler knows it's in deep financial trouble, which means all of its assets are at risk. Nardelli used this argument when he asked Congress for money from Treasury Secretary Henry Paulson's Troubled Assets Relief Program.

Paulson succeeded John Snow as head of Treasury in 2006, when Snow left the Bush administration to become chairman of Cerberus Capital Management, the private capital partnership that bought Chrysler the following year. Connecting dots between the Treasury Department and Chrysler naturally raises suspicions of political favors.

But set suspicion aside. If we let the numbers tell the story, they still don't add up.

Last month, Standard & Poor's cut its rating on privately held Chrysler to CC, which puts the company's debt deep in junk territory with "little prospect for recovery." The next step down is D, which stands for default.

Put another way, if Chrysler were to apply for a home mortgage, it wouldn't qualify. None of the big Wall Street banks propped up with TARP funds would be willing to give Chrysler a dime with a credit rating like that. Which is why Uncle Sam is the lender of last resort.

If the same banks that bundled and marketed risky subprime mortgages around the world won't touch Chrysler, anyone outside the automotive industry must be scratching their heads over the Treasury's latest actions.

The socioeconomic argument for saving Chrysler is compelling and the likely impact on an already weakened economy would be enormous. But at some point, something's got to give.

Meanwhile, for investors searching for a bottom in this bear market, the flow of federal money to subprime industries obscures the view and further blurs the line on sound risk assessment.

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